What happens if the eurozone breaks up

Market and sovereignty-sharing principles of the EU are enshrined in treaties and enforced by unelected bodies, such as the European Central Bank and the Court of Justice of the European Union.

It is also difficult for the collectives of the Council and the European Parliament to be responsive to dissatisfied voices in light of divergent preferences across and within member states and between and within the elites and the masses. In particular, measures to assuage dissatisfaction among those who fear economic competition and budget cuts in the framework of the Economic and Monetary Union can increase politico-cultural dissatisfaction about migration and power-sharing in the EU and vice versa.

Without effective voice options, withdrawal might be more likely. EU loyalty is also rather limited in comparison to national loyalty, for which exits from the EU are even less restrained. Yet, a full exit of a member state is rather unlikely. As most governments, parties, and voters think that national states cannot do better than the EU or that other international organisations such as the Eurasian Economic Union EEU cannot offer states a better deal, they prefer to remain in the EU.

Even in Greece during the heat of the debt crisis, a majority perceived life outside the EU as being worse than inside. Only in the UK did a majority perceive the costs of EU membership such as migration as being higher than the benefits of leaving. The lack of viable national or international alternatives to the EU has been the key explanation for why the mechanism of exit, voice and loyalty never led to steps towards a full exit of a member state until now, with the UK as the exception.

Therefore, a complete breakdown of the EU soon appears to be highly unlikely. On first sight, the EU would therefore have time to recuperate.

These partial exits undermine the EU, as they constrain the effective and legitimate enforcement of its rule in other words, prevent partial exits , to strengthen the benefits for its member states, business, and citizens to reduce dissatisfaction , to enhance its internal infrastructure to effectively address dissatisfaction, and to cultivate loyalty to the EU.

When member states, business, voters and other actors are subsequently less enticed to exchange resources in the EU, the EU will lose even more means to strengthen itself and its attractiveness.

Partial exits thus sap the EU slowly from within. Rather than experiencing a sudden collapse, the EU would thus instead sink slowly into oblivion. Perhaps as a message of comfort for those who want to maintain the EU, many if not all states, empires, regional organisations, currency areas, and federations have previously struggled with similar problems. It is no surprise that many political formations have disintegrated or still face disintegrative challenges just think of Spain, Canada, Belgium, and the UK.

The EU still obtains necessary resources to strengthen its locking-in capacity and attractiveness from member states such as Germany, which are relatively satisfied about the EU, more loyal to the EU, and perceiving the EU still as the best or least bad alternative to attain security, prosperity, or environmental sustainability.

This will allow the EU to limp ahead for the years to come, but with many members rather grudgingly accepting it as the least unattractive option. It represents the views of the authors and not those of the Brexit blog, nor the LSE.

It does not point out how the whole dynamic would change if the UK succeeds in leaving the EU. It would set a terrible example to other countries, especially Eastern European members of the EU.

Dark clouds are now hovering once again over Europe in regard to the single currency, eurozone sovereign defaults and an interlinked banking crisis.

This is not going to take three years. Complex Consequences If the eurozone breaks-up, it is likely to have enormous consequences for world markets and the global economy. It will also mark the end of the European "political" Union as we know it. The eurozone has been lurching from one debt crisis to another. Many distinguished ATCA members are now asking, "Can the single currency survive in its present form, and if not, what are the consequences?

The huge exposure of the eurozone banking system to sovereign debt; 2. The fear that self-imposed austerity measures are likely to smother any chance of economic recovery in Europe. Threat to the Status Quo Under the current structure and with the current membership, the euro is clearly not working.

The problem facing the euro now is to convince the world that it is more than an act of political levitation underpinned by a series of inconsequential summits that announce a plethora of smoke-and-mirror policies.

Although the official line has been for month to say that the euro will somehow pull through, rising bond market volatility suggests that it most probably will not. This is not merely a question of putting trillions of euros together to bail out weaker member nations, but creating an organisational structure that will give the currency robustness and resilience which it appears to lack at a fundamental level at present. The euro creates more economic costs than benefits for at least some of its members -- a fact that has become painfully obvious to some of its participants in recent years.

Either the current structure will have to change, or the current membership will change. The Eurozone status-quo cannot remain intact. Sovereign default; 2. Corporate default; 3. Collapse of the banking system, at least in part; 4.

Collapse of international trade and interruptions of supply chains; and 5. Devaluation of a new currency, which may offer limited assistance in the short term as import costs cause inflation. Together, Italy and Spain make up about a quarter of the EU contributions and together they are bigger than Germany and substantially bigger than France.

If a stronger country such as Germany or France leaves the euro, the consequences include: 1. Corporate default; 2. Recapitalisation of the banking system; 3. Collapse of international trade and interruptions of supply chains; and 4. Appreciation of a new currency, which may offer limited assistance in the short term as export prices rise and economic activity begins to stall.

Banking System Contagion The banking system is likely to be the most immediate transmission mechanism for carrying the crisis beyond the borders of the nation state seeking exit. If bank runs and enforced conversions in the exiting state are witnessed elsewhere in the Eurozone, citizens of any euro member state that is considered to be a possible candidate for secession would start to liquidate across all asset classes and withdraw their bank deposits from their domestic banking system out of fear and panic.

Federal Reserve. Eliminating the euro would decentralize monetary authority back to the member nations. For example, a German central bank would control interest rates and the money supply in Germany while a Portuguese central bank would control them in Portugal.

Banks could recapitalize in their national currencies although they would likely have to keep more active foreign exchange balances for regional trade and reconciliation.

The various exchange rates would change the relative values of some assets held internationally, and the workers in less-inflationary European job markets would see a relative income boost compared to European governments with loose monetary policy. For example, it is likely that workers in highly productive Germany would have an easier time affording goods and services produced in less-productive Slovenia. However, it is unlikely that other economic policies would remain unchanged if the euro failed.

Even if the EU technically survived, other restrictions could be implemented on immigration or trade. Pro-euro parties would likely suffer political consequences, allowing for nationalistic parties to gain influence and to implement new fiscal policies.

If Schengen also failed, the economic consequences could be extremely disruptive, even if only in the short term. Accessed Aug. International Markets. Monetary Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. State of the Eurozone. End of the Schengen Area. Impact Outside the EU. Reintroducing National Currencies. Impact on Banking, Forex, and Trade. A collapsed euro would likely compromise the Schengen Agreement, which allows free movement of people, goods, services, and capital. Each member country would need to reintroduce its national currency and the appropriate exchange rate for global trade.

Eliminating the euro would also decentralize monetary authority back to the member nations. Article Sources.